State oil well regulators, facing a huge bill to permanently seal three shut-in wells after a Cook Inlet producer went bankrupt, attempted to pass the costs onto another company in August, but a federal bankruptcy judge in Alaska struck down the order last week.
The order from the Alaska Oil and Gas Conservation Commission, issued Aug. 31, violated bankruptcy law by preventing the company in bankruptcy, Aurora Gas, from selling some of its assets to satisfy creditors, Judge Gary Spraker said in a decision made last Tuesday.
The commission's order essentially held the sale of Aurora Gas's small Nicolai Creek gas field "hostage," Spraker said.
A different company with different owners, Aurora Exploration, has agreed to buy the Nicolai Creek field and its six gas-producing wells from Aurora Gas for $100,000. The sale can't move forward without the commission's approval.
Aurora Exploration, however, does not want to purchase a separate field owned by the bankrupt company, the Three Mile Creek field with its three shut-in wells, court documents show.
Aurora Gas should be the company to plug the three unused wells. But it is in bankruptcy and can't afford to do so, leaving the state facing that responsibility, according to court documents.
Spraker's decision said Aurora Exploration can't be forced to pay off Aurora Gas's liabilities at a field it does not plan to purchase.
The companies aren't related, despite their similar names, said Paul Craig, partial owner of Aurora Exploration, on Monday. The two fields are located on Cook Inlet's west side, about 20 miles apart.
No one denies the commission's right to impose a "reasonable" bond to ensure Aurora Exploration, when needed, can properly plug and abandon the six producing wells it wants to buy, the judge said.
But the commission overstepped bankruptcy law in its effort to require Aurora Exploration to also cover abandonment costs at the other field, Spraker said.
The three wells need to be properly sealed with cement and capped with a metal plate, with environmental hazards such as wellheads or above-ground pipe removed.
Making sure scores of unused wells in Alaska are properly plugged and abandoned is an increasingly urgent concern for the commission as the state faces a multibillion-dollar deficit.
The commission is particularly concerned with small operators with limited resources that can't cover remediation costs. The cost to plug and abandon each well could be as low as $100,000, or many millions of dollars, depending in part on a well's remoteness, commissioner Cathy Foerster has said.
The commission has launched an effort to review what Foerster has called the agency's "paltry" bonding levels. The commission has typically required $100,000 bonding for an operator's first well, and another $100,000 for all the operator's other wells. But it could set higher amounts.
[Bonding standards put Alaska at risk, agency says]
On Friday, Foerster said she could not speak about Spraker's decision because the issue remains "under adjudication."
Aurora Gas, created in 1999, entered bankruptcy proceedings last spring. Companies owed money by Aurora Gas filed involuntary bankruptcy petitions against it.
The commission's order was signed by commissioners Foerster and Daniel Seamount. Commission chair Hollis French, who was on leave in late August, did not sign the order.
The order provided Aurora Exploration with two options to take over the Nicolai Creek gas field.
Under one scenario, Aurora Exploration could provide a $200,000 bond for the six Nicolai Creek wells. But it must also agree to plug and abandon the three wells at Three Mile Creek.
Under an alternative, Aurora Exploration could post $6 million in bonding for the six wells at Nicolai Creek.
Spraker's decision said the $6 million alternative is "prohibitively high." The commission offered no evidence suggesting why it would be so expensive to abandon those wells, he said.
That no other alternative is offered suggests the commission wants Aurora Exploration to accept the $200,000 bond with its extra obligation to plug and abandon the three wells it doesn't want, Spraker said.
Aurora Exploration had said it would post a $200,000 bond, but would not assume the liability of the three shut-in wells.
The commission said that was not enough.
Now that Spraker voided the order, the ball is in the commission's court to set acceptable bonding conditions for the Nicolai Creek field, said Craig, with Aurora Exploration.
Doing so will allow the sale to move ahead, and gas production to continue at the six Nicolai Creek wells, he said.
"We're hoping the state sees the mutual benefit of a negotiated agreement that's in the best interest of all parties concerned," Craig said.